Steven Joyce: Don’t need a weatherman to feel these winds

Wellingtonians are used to wild weather, but now it’s not atmospheric conditions causing the storm. Photo / Mark Mitchell

OPINION:

It’s nearly Budget time in an election year. The Finance Minister looks out the Beehive windows and sees darkening economic skies.

The country’s economy is becalmed. There is every chance it is already in recession, ahead of a predicted slowdown in the rest of the world. The Reserve Bank is continuing to lift interest rates in an attempt to cut off persistent inflation.

The balance of payments has blown out to record levels, a sure sign the country is living beyond its means. The Government has lifted its spending dramatically over recent years but it doesn’t seem to be improving public services.

The public are getting restless as their after-tax incomes are squeezed. The ratings agencies are just starting to get nervous.

That picture would be familiar to our current Finance Minister Grant Robertson. It’s actually a description of New Zealand’s economic outlook in 2008, just before Robertson’s Labour predecessor Michael Cullen handed down what proved to be his final Budget.

In 2008 we were in recession by the time Cullen delivered the Budget speech. He just didn’t know it. The golden weather had come to an end, and the huge increases in spending over recent years were looking unsustainable.

Inflation wasn’t as high as it is now, but it had spiked up rapidly to 5 per cent. The balance of payments deficit, while it had blown right out, was not quite as big as it is now.

Just like Robertson, Cullen hated reducing taxation. He preferred to let bracket creep steadily increase the tax take so he could spend more of the public’s hard-earned money.

He relented in 2005, offering a derisory level of tax reductions in what became known as the chewing gum Budget. Those were cancelled after the 2005 election in a fit of pique, and he finally offered tax cuts again in 2008. By then the public had been squeezed enough.

In Robertson’s case, he’s never vacillated on tax. He legislated to cancel the previous National Government’s plan to address bracket creep for middle income-earners immediately after the new Government was formed in 2017.

He whacked on a tax hike for top income earners at the same time. The whole country knows that if he had his druthers, he’d be introducing a capital gains tax now, and probably a cyclone levy for good measure.

There are some differences between 2008 and 2023. It took Cullen nine years to grow government expenditure at the same rate Grant Robertson has managed in six. Some of Robertson’s spending was warranted because of Covid, but it should have been time-limited and it hasn’t been.

Thanks to Cullen’s conservative financial stewardship in the Clark Government’s first five years, the Government had effectively no debt.

This contrasts with Robertson racking up net Crown debt from 17 per cent of GDP to nearly 30 per cent over five years, or 36 per cent before he changed the measure to make it look smaller.

The Covid border closures mean the labour market is so tight that this Labour Government has been able to push up wage inflation much more aggressively than its predecessor would have been able to without causing substantial unemployment, at least not yet. This has helped make the inflation spike higher than it otherwise would be.

Of course, in 2008 inflation ended when the world entered the Global Financial Crisis. There is no sign of another GFC now — just the odd bank falling over in the US and Europe due to the giddy U-turn in the monetary stance of central banks from the height of the pandemic to now.

So what does the Government need to do in its Budget in just 12 days’ time to avoid meeting the fate of its 2008 forerunner? To my mind there are about five things.

First, it must meet the recovery needs of the folks in Hawke’s Bay, Gisborne, Coromandel and Auckland affected by the recent storms. They have been waiting very patiently for the Government to get its act together and unveil a plan.

In this context, the Budget will need to be about more than just writing a cheque. It will need a detailed programme of delivery or, given the Government’s record, cynicism will abound.

Second, it must find a way to improve basic services like health, education, and now transport, without feeding inflation. That means initiatives that fund for performance, not business as usual. And it must be accompanied by an entreaty for moderation in pay rises, or we will ratchet up inflation further.

It will need to find a way to ease inflationary pressures on the squeezed middle. That suggests tax threshold changes, importantly matched by the Government reining in its spending so that tax relief is more than neutral from an inflationary perspective.

Ministers also have to hope the public forgives them for being so steadfastly against tax relief while the tax take ballooned in the past six years.

Fourth, it will need to have a real plan for economic growth so New Zealand can start to make inroads into that record balance of payments deficit. This will be tricky as it will go against every regulatory bone in ministers’ collective bodies.

And last, the Budget will need to show a plan not just to come into balance, but actually reduce government debt.

That’s very important. In these inflationary times, the cost of debt servicing is starting to get expensive. More fundamentally, a brief look at the last 20 years shows that disasters and crises have a habit of turning up with monotonous regularity, be they storms, earthquakes or even pandemics.

Notwithstanding the Pollyannas who take comfort when comparing our debt levels to those of much larger countries, we are a small isolated country at the bottom of the world with no one to bail us out. We need a financial buffer for the next crisis and the one after that, and at the moment we don’t have much of one.

There is much for the Government to achieve in this Budget. That may explain the invisibility of Grant Robertson in recent weeks. He could have checked out, as some believe, or he could be down in the engine room trying to square all these circles.

One thing is sure: he will have to stop defending all his previous actions if this Budget is to be the one New Zealand needs.

Unfortunately, there is something about the history of Labour governments spending buckets of money and ignoring the consequences which doesn’t provide reassurance. Will this one go down like the last one, or wake up in time?

- Steven Joyce is a former National Minister of Finance. He is director at Joyce Advisory.